Working Paper BETA #2018-28

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Title : Country-specific fiscal reaction functions: what lessons for EMU ?

Author(s) : Amélie BARBIER-GAUCHARD, Nicolas MAZUY

Abstract : This paper deals with heterogeneous fiscal behaviors of euro area countries. We estimate EMU Members States fiscal reaction function using time series approach covering the period 1990 :Q1-2017 :Q2. Among the major lessons from this analysis, three general and striking results are worth highlighting : (1) factors explaining national fiscal reaction function in the short run differ from those in the long run, (2) some explanatory variables seem common to all countries while others only concern a small number of countries and (3) the sign of the impact of these explanatory variables can also differ between the countries. Finally, this paper raises the implications of heterogeneous fiscal policies on the functioning of monetary union and asks the question of fiscal convergence in the euro area.

Key-words : fiscal reaction functions, euro area, error correction model, heterogeneity.

JEL Classification : E62, H61, H62, C33, C41